Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:20]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:36]

Thank you, Mary, and welcome to Risk Parity Radio. If you have just stumbled in here, you will find that this podcast is kind of like a dive bar of personal finance and do-it-yourself investing. Expect the unexpected. There are basically two kinds of people that like to hang out in this little dive bar. You see in this world there's two kinds of people my friend. The smaller group are those who actually think the host is funny regardless of the content of the podcast. Funny how? How am I funny? These include friends and family and a number of people named Abby. Abby someone. Abby who?

Mostly Voices [1:23]

Abby normal. Abby Normal. The larger group includes a number of highly

Mostly Uncle Frank [1:32]

successful do-it-yourself investors, many of whom have accumulated multimillion dollar portfolios over a period of years. The best, Jerry, the best. And they are here to share information and to gather information to help them continue managing their portfolios as they go forward, particularly as they get to their distribution or decumulation phases of their financial life.

Mostly Voices [2:04]

What we do is if we need that extra push over the cliff, you know what we do? Put it up to 11. Exactly.

Mostly Uncle Frank [2:11]

But whomever you are, you are welcome here. I have a feeling we're not in Kansas anymore. But now onward, episode 341. We are back from our recent travels to Tennessee and Massachusetts. And we have a newly minted college graduate in the family who is also coming home soon. More importantly to his father, he has secured gainful employment as a financial analyst at a local credit establishment.

Mostly Voices [2:47]

Top drawer, really top drawer.

Mostly Uncle Frank [2:51]

And we'll be starting on that in June. Now the emails are piling up here and we will get to several of them today. But before we get to that, there's been a negative development in the world of financial calculators in that it appears that Portfolio Visualizer has been bought out or reconfigured their business model such that they are limiting the access to the data for analysis of portfolios of specific ticker symbols. And they're limiting it to 10 years unless you want to pay up for more data, which I don't think is worth it, but it might be worth it for you. Not going to do it. Wouldn't be prudent at this juncture. You are still able to access the asset class analysers there for as much data as they have. And in some respects, those are actually more useful because they had data going back to the 1970s anyway, which you're not gonna get with most tickers. Rob Berger has already put out a video on this topic, and I will refer you to that. It's always nice to have some competent person do all my work for me. I just stare at my desk, but it looks like I'm working. But he also mentions on that video and our listener Micah from Alaska also has contacted me about a new back tester. Surely you can't be serious. I am serious and don't call me Shirley. It's called testfole.io and it's kind of a primitive do it yourselfer thing but it actually works pretty well and I'll link to that also in the show notes. What's particularly interesting about it is that the person who put it together, and I'm not even sure who that is, has also put together synthetic modeling of the managed futures ETFs we commonly talk about here, DBMF and KMLM, going back to the year 2000 and the year 1993, I believe, respectively. And so now we can actually model some of those portfolios going back Further with those assets. And the results actually look really good. So I will link to in the show notes a sample of that showing some golden ratio kind of portfolios with managed futures in them. And you can check those out. But I haven't figured out all of the ins and outs of that calculator yet. I do think it'll be useful going forward in the future. But it's kind of a nice end run around the problems we're having. at Portfolio Visualizer right now. Maybe they will shape up and fly right in the future, since all of this data is in fact publicly available. It's just a matter of organizing it and putting it behind a calculator.

Mostly Voices [5:42]

That's the fact, Jack! That's the fact, Jack!

Mostly Uncle Frank [5:50]

If anyone has any more information about this new calculator, I'd be interested to hear it or see it. So let me know if you do.

Mostly Voices [6:01]

What would you say? You do here? Well, look, I already told you. I have people skills. I am good at dealing with people. Can't you understand it? But now let's get to your questions that have been piling up.

Mostly Uncle Frank [6:12]

And so without further ado, here I go once again with the email. And first off, First off, we have an email from James.

Mostly Voices [6:24]

Hey Jim, baby. I see you brought up reinforcements. Well, I'm waiting for you, Jimmy boy.

Mostly Uncle Frank [6:32]

And James writes, hi Frank, Morningstar and others have shown using flexible withdrawal strategies

Mostly Mary [6:39]

boosts what a retiree can use as an initial safe withdrawal rate and what they can spend total across retirement. You've talked about 3% basics plus 1% luxuries plus 1% extravagances budget breakdown in the past. What kind of rules do you believe are best for deciding when to cut out the extravagances and or luxuries? Would it be any time the portfolio drops below the initial inflation adjusted value? This could imply for any given year one may withdraw the smaller of a 5% initial safe withdrawal Adjusted for inflation, same as fixed real method, or B, 5% of prior year ending portfolio value implemented when portfolio is in a drawdown versus initial real value. In my opinion, flexible safe withdrawal strategies that can boost initial spend and total lifetime spend can be especially useful to individuals with a smaller than ideal asset pool. You may be interested in these charts I made using Morningstar data. It's an attempt to gauge the efficiency of common flexible strategies, safe withdrawal rate versus cash flow volatility. The numbers in parentheses are the median end portfolio value slash bequest. Using risk parity style portfolios could reduce the volatility versus the dumb 60/40 portfolios Morningstar modeled. You are correct, sir. Yes. Your thoughts on the best practices for flexible spending strategies would be greatly appreciated, James.

Mostly Uncle Frank [8:14]

All right, starting with what you said last first. These charts you put together are interesting, although I'm unable to link to them directly in the show notes. What these do reflect just so our audience understands is about a year and a half ago Morningstar put out a report on safe withdrawal rates in which they not only calculated a base rate, but they also used a bunch of different variable withdrawal strategies to see how that would affect a safe withdrawal rate. Because the default strategy of just increasing your withdrawals based on CPI inflation really doesn't make any sense in the real world because you're not just going to spend money just because the CPI says you should spend money. And so they put together a number of these strategies that included either foregoing inflation or reducing the amount of inflation to CPI minus one, using an RMD method or using a guardrail method popularized by Geithner and Klinger, and discovered that, not surprisingly, all of those methods tend to increase a base safe withdrawal rate of a portfolio and the kind of thing they were using was kind of a basic 60/40 portfolio. But I think this is going to be pretty much universally applicable to similar kinds of portfolios with similar allocations to stocks. And so the not taking as much inflation adjustment methods tend to do increase the safe withdrawal rate by about 0.5%. And then as you went out to the more aggressive variations like the full guard rail strategy, that increased the safe withdrawal rate of their base portfolio by about 1.2%, which you have represented in these graphs here. I will also link to the report in the show notes so anybody can check that out if you like. And so this, from my perspective, is a really good way to create a safety valve, if you will, so that if your portfolio works well under the baseline assumption of taking CPi plus inflation, and you know you're going to apply one or more of these variable withdrawal rates, you basically have a built-in safety buffer just by varying your withdrawals or taking less of a withdrawal in the case of the inflation adjustment. As we talked about in another episode recently, studies from the Rand Corporation have shown that an average retiree seems to be withdrawing at a rate of CPI minus about 2% inflation, which is even less than previous studies would have shown. The David Blanchett research on the retirement spending smile averages out to about CPI minus 1 for an average retiree's inflation rate. Our own inflation rate, as we've calculated the past few years, has actually been a deflation rate because we've been spending less money overall. And I think that's often typical for many retirees simply because you don't have commuting and other expenses associated with working a job in a big office somewhere. Okay, so how does this play into the 3-1-1 spending plan that I've discussed in a number of episodes and most recently in episode 338? And the way I look at it is this, honestly, is that that 3-1-1 plan is already accounting for increasing at the rate of CPI inflation, because that's what all of these Monte Carlo simulations that we typically do is based on. So that 5% withdrawal rate is already conservative if you have a decent portfolio for withdrawing from. Now, as I mentioned, we do track our own individual rate of inflation, and this is One thing as a retiree you should be doing year on year figuring out are you spending more or less and how much and why. And so that in fact for us, since we're not spending any more money, is in fact telling us we could be spending more money. That by itself creates a buffer for us of probably somewhere between 0.5 and 1%. I don't really worry about exactly how much it is. Now, I suppose if you were trying to push it out and actually spend something more like 6%, you would want to incorporate something like a guardrails kind of strategy and formalize that with some rules. There is actually a very nice calculator over at Portfolio Charts that I will link to where you can take your portfolio and then apply various kinds of strategies and see how that would have performed historically. including guardrail strategies, something called the Kitsis Ratchet, where you increase your spending as your portfolio goes up and then you don't increase your spending if it doesn't go up. So I've actually never gone to the trouble of figuring out how you would apply a guardrail strategy to this since I don't think we need to. Now if I were just trying to think through it and kind of spitball it, where I would be concerned is when the portfolio would have gone down, say more than about 20%. and that has basically never happened with a golden butterfly kind of portfolio. And it's close to never happening with a golden ratio style portfolio. And if you go back and look at the link I'm going to put up with the new test folio thing, you'll see if you do want a golden ratio style portfolio with a managed futures component, that gives you some really nice results with I think a maximum drawdown of about 17%, at least over the past 30 years or so. So I would say I'd probably only even think about it if it were to go down over 20%, but then I probably would not think about it too hard if in fact I was spending less money anyway like we're doing right now. I suppose this is something we should work on in the future because as you say, flexible safe withdrawal strategies that can boost initial spend and total lifetime spend can be especially useful to individuals with a smaller than ideal asset pool. And if this podcast has any sort of overall purpose and gift to the world, if you will, it would be to show people how that they can retire with less and still achieve their goals, both by holding a better portfolio for withdrawals and implementing some of these variable withdrawal strategies. But at this point in time, I do not have the wherewithal to do these sorts of Calculations, and so I do rely on the Morningstars and the Portfolio Charts Calculators of the World to show us how that can work.

Mostly Voices [15:02]

It's not that I'm lazy, it's that I just don't care.

Mostly Uncle Frank [15:07]

I am comfortable knowing that I could be spending probably up to 6% if we had to, just by not inflating our lifestyle or not inflating it very much. Ramming speed! Ramming speed! And this goes to my general philosophy of all of these things when you're talking about uncertainty of the future. It's better to be generally correct and in a ballpark where you can move around a little bit than trying to be too precise and end up being precisely wrong. Which is what I see a lot of people doing with some of these calculators. That's not an improvement. So hopefully that helps and thank you for your email. You never could find your head with both hands. Like it used to be Jimmy. Remember? Second off. Second off, we have an email from Andrew.

Mostly Mary [16:23]

and Andrew writes. Hi, Frank, do I have a gambling problem? You can't handle the gambling problem. I retired last year at age 50. Yay. I have a net worth of approximately $5.5 million with about 10% of that in traditional retirement accounts. You can't touch this. You can't touch this. You can't touch this. I have 1.5 million in a golden ratio portfolio. The rest is in equity and rental properties, some real estate syndications and some crypto. Don't panic, just 2%. Well, you have a gambling problem. We are going to move home this year and I am ruminating on how to finance it. The Pax Domestica in our household means my wife and I split things 50/50. So my part of the financing will be no more than $750,000 and will more likely be closer to $600,000. I have three options in my mind. One, sell stock from my Golden Ratio portfolio. Two, seek a traditional mortgage. Three, take a loan against my portfolio. I am leaning towards the third option, taking a loan, thus my concerns about having a gambling problem. You have a gambling problem. Some extra info. My Golden Ratio portfolio is only a few years old, so selling will not likely produce an insane tax bill. I am limited by the Reg T rules and I believe I can borrow 50% of my portfolio value. Given the numbers above, it does mean that I will need to have a solid plan for margin calls. I suspect a 20% drop may trigger a margin call, although I need to do a little Excel work on that. The market we are looking to buy in is still very much a seller's market, so I think we'd be better placed as a cash buyer. So taking a traditional mortgage would eliminate that advantage. My portfolio is at Interactive Brokers, I switched to pro accounts, which means my rate is base plus 1.5%, I believe, so lower than a traditional mortgage. It would be a floating rate rather than a fixed, of course. All else equal, I believe the portfolio loan provides the highest expected return. However, it is the only option that could lead to a large loss too. Is the easy chair available for you to help me think through how to think about this? Yes, a little inception-y. Yes. If you think there is some mileage in the borrow idea, how would you consider repayments? For example, if I sold a rental property and received, say, $100,000, would you be inclined to use that to pay down the loan or to boost the portfolio? I'm not sure if it still exists now, but in England in the early 2000s, A friend had a mortgage account that was also his checking account. His salary would go into the account and reduce the debt down a little. Then during the month it would tick up as he spent money. The selling point of that product was that it reduced the overall amount of total interest paid. Of course, his debt was secured by his apartment, not by a portfolio that could drop 30% and trigger a potential margin call. One concern I have is that most of my assets are positively correlated with the overall health of the economy. If we were to have a deeper session, I would need to have something to draw on in the event that I approach the margin call threshold. Thanks, Andy.

Mostly Uncle Frank [20:10]

Well, you've got some interesting questions here, and I'm not sure I could ever give you a definitive answer simply because it is dependent on unknowns in the near future as to performances and interest rates and all sorts of other things. Hearts and kidneys are Tinker Toys. The safest course of action, I think, would actually be the mortgage route simply because if you can fix that debt, then you know exactly what it is, but that does not preclude you from then using the margin account to pay part of that down early or just selling some of the portfolio and using that to pay down some of the mortgage. Now you said that might not work for you given your real estate market. I'm afraid I can't speak to that. Forget about it. But I do have a general rule of thumb in these situations, which is that if you are presented with two alternatives that are reasonably good on their own, but it's unclear which one is better, and there's really no way to tell which one is better going forward in the future, your best choice is often to do some of both, or in this case, some of all three. which is why I suggested getting the mortgage first and then working that down from there. In terms of efficiency, I think taking the margin loan is probably the most efficient, but the risk you have is because it's a floating rate, if interest rates go up, things could get a lot worse. Or if there is some kind of market crash, you could be faced with a margin call and that would be a worst case scenario for something like that. But then you also have to consider, well, what is the probability that your golden ratio style portfolio will fall by a significant amount? And part of that depends on exactly how you've constructed it. My recent research seems to indicate, and what I do personally is make sure we have some managed futures in there instead of, say, the REITs like we have in the sample portfolio. Because that will dampen the volatility and lessen the probability that you would face a margin But I'm afraid all of this really requires a crystal ball.

Mostly Voices [22:27]

A crystal ball can help you. It can guide you.

Mostly Uncle Frank [22:31]

But if you're going to use one of those, then you probably need to decide which one to use. As you can see, I've got several here.

Mostly Voices [22:37]

A really big one here, which is huge. This is the one that I tend to use more often. I have a calcite ball and I have a black obsidian one here. And hopefully you will not need any help from the beyond. Now you can also use the ball to connect to the spirit world.

Mostly Uncle Frank [23:02]

So I think I'd probably look at the mortgage option. first and talk to a few brokers about what that would look like. Because once you know the cost of that, then you can, I think, do a better valuation as to what makes the most sense here. And for your last question in terms of paying down the loan, I think my considerations there would have to do with what is the interest rate on the loan and how does that compare with projected returns of the portfolio. Bear in mind that if interest rates do drop, you could always refinance a mortgage and also extend out the term. So again, I would probably follow my general rule of thumb for these situations when faced with two reasonably good options, but it's unclear which one is better. The best course of action is to do both. And so I would implement some kind of plan that incorporates both paying down the mortgage or loan and adding to the investments. Just as long as you're not taking too much leverage there.

Mostly Voices [24:08]

Well, you have a gambling problem.

Mostly Uncle Frank [24:11]

These are all very interesting questions and of course they are unanswerable. But hopefully that helps a little bit, at least to think about it. and thank you for your email. Next off, we have an email from Phil. Phil? Hey, Phil.

Mostly Voices [24:44]

Phil Connors. Phil Connors. I thought that was you.

Mostly Mary [24:52]

And Phil writes：Frank, somehow I thought of all the sound bites you play during the show while watching this. Maybe it was David Bowie. Heroes might be a funny way to reference financial advisors. Thanks for your humor. I'm funny how? I mean funny like I'm a clown. I amuse you. By the way, your point to earn regarding the paper on 100% stock portfolio was super helpful for adjusting my brain. Cheers, Phil.

Mostly Voices [25:15]

Am I right or am I right or am I right? Right, right, right.

Mostly Uncle Frank [25:22]

So this is a funny video that Phil has linked to and the idea behind it is what if we took the popular actors from the 1980s and put them into an Avengers movie?

Mostly Voices [25:30]

It's not a tumor. It's not a tumor at all.

Mostly Uncle Frank [25:34]

So it's got things like Clint Eastwood and Kevin Bacon playing various characters. I was very pleased to see Christopher Walken there.

Mostly Voices [25:45]

Babies, before we're done here, y'all be wearing gold-plated diapers.

Mostly Uncle Frank [25:50]

Now, the paper Phil is referring to is this Scott Cederberg thing that we've beat like a dead horse and others have beaten like a dead horse. So I won't go through that again, but I will link to Big Earn's critique of that paper, which I think is Very useful and of course reminded us that it was kind of a Pickelhaube portfolio based on that obsolete but flashy old German helmet with the spike on top. And that does refer back to episodes 319 and 320. Thank you for reminding us of that and thank you for your email. Last off. Last off, we have an email from Frodo.

Mostly Voices [26:48]

Frodo of the nine fingers and the Ring of Doom.

Mostly Uncle Frank [26:57]

And Frodo writes, Hi, Frank and Mary.

Mostly Mary [27:01]

Thank you for your trustworthy, well-researched podcast. It is nice to have a reliable, data-driven source of information on portfolio construction. You are also pretty humorous.

Mostly Voices [27:13]

You are talking about the nonsensical ravings of a lunatic mind.

Mostly Mary [27:18]

I'm in line to manage my mother's portfolio, partially inherited from my father and currently being managed by an advisor at Schwab. She has two accounts, an IRA about $400,000, 17 funds, and a taxable account over $700,000, 19 funds. Obviously, that's a lot of funds. I'm not sure how it came to be that way, if my dad did it or if he got help from some advisor. But it seems unnecessarily complicated, and if or when I take it over, I'd like to simplify to something resembling a golden butterfly with a slightly higher allocation to equities taken out of the ST Treasuries. maybe 25% total US stock, 25% small cap value, 20% long-term treasuries, 10% short-term treasuries, 20% gold. Still open to playing with the non-equity allocations if you have a suggestion. So here's the question：how should I transition her? Do I do it all at once in the IRA? Is it even worth doing in the taxable account, or should I just let it ride for tax reasons? If it matters, she's taking required minimum distributions from the IRA, about $25,000 a year, which supplements his Social Security income of about $20,000 a year and seems pretty comfortable. I think her goal is to leave as much to us children as possible, though I would like to keep the money available for her care should she eventually need more help. She's quite independent for now, at almost 85. Any suggestions? Frodo.

Mostly Voices [28:50]

It started with a hobbit in Gollum's cave of gloom. Well, Frodo, what you're doing here does seem to make a lot of sense to me. Where there's a whip, there's a way. Where there's a whip, there's a way. Where there's a whip, we don't want to go to war today.

Mostly Uncle Frank [29:19]

Where the Lord of the Lashes has a say in it. I agree that there's probably no reason to have 19 different funds and they're likely to be overlapping. I would take them and go through them on the Morningstar Analyzer and in particular look at their factor and sector allocations. But you might just want a clean house on those in the IRA in particular. I wouldn't necessarily just sell them all willy-nilly in the taxable account due to the tax implications of that. But sometimes what you can do with this is group them, if you will, based on their factor makeups. So you can say, well, these three funds are all large cap growth or large cap blend. and these three are over here, and their mid-cap value, and so on and so forth. And that may give you a better idea of what you've got there altogether. I will say that her income looks low enough that she might be able to take advantage of some tax gain harvesting, and I would look into that, or perhaps time that for one year, and then take more out of the IRA or whatever. in a different year, subject to the RMDs of course. As you mentioned, the Golden Butterfly portfolio is by its nature conservative with only 40% stocks in it. So adding some more stock exposure to me always makes a lot of sense. And that 50% range is just fine. I would say anywhere between 40 and 60 is still be a good conservative allocation to that. I think you are correct to take it out of the short-term treasuries, which really aren't doing anything for somebody like this in this circumstance.

Mostly Voices [31:09]

That and a nickel will get you a hot cup of jack squat.

Mostly Uncle Frank [31:14]

But you might also want to play around with our new calculator that has managed futures that go back 30 years to see whether that might be something that you also would want to add which I would substitute for part of the goal, I would think. In terms of the transition, yeah, I would just do all of it in the IRA to the extent you can do it. But that would involve first looking at what's in the taxable account and categorizing it by its factor makeup or other makeups, because at least some of that can just stay there as, say, the stock portion or a lot of the stock portion. and this doesn't need to be that exacting. I know it would be nice to get rid of all these things, but if it's going to cost you something in taxes, it may be better to just ride some of them as long as you need to, at least the ones that would cause a big tax bill. As always, you don't want to let the perfect be the enemy of the good. So it's okay if what you end up with does not look all neat and tidy like a sample portfolio would. I think a lot of people find themselves in this situation as they get towards retirement having accumulated just all kinds of things over the course of a lifetime. But if you can categorize them correctly, then you may not need to actually sell them or change them all that much. I actually would not be surprised if the Schwab advisor had not already split the equities into kind of a growth pool and a value pool. which is frequently how management is done, but what you'll probably end up cleaning out are a whole bunch of random bond funds, particularly if you've got corporates in there that really probably don't have a place in this portfolio anyway. But you sound like a very good boy, Frodo, and maybe someday we'll find your finger and reattach it. Hopefully that helps, and thank you for your email.

Mostly Voices [33:13]

Frodo of the Nine Fingers and the Ring of Doom accepted a heavy burden for the fires to consume. But now I see our signal is beginning to fade.

Mostly Uncle Frank [33:36]

We will pick up again this weekend with our weekly portfolio reviews and plow through some more of these emails. which are still stacked up from April. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, follow, give me some stars or a review. That would be great. Okay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Voices [34:27]

Where there's a whip, there's a whip, where there's a whip, there's a whip, where there's a whip. We don't wanna go to war today, but the Lord of the lash has spoken. We're gonna march all day, all day, all day. Or where there's a whip, there's a way. Left, right, left, right, left, right.

Mostly Mary [34:54]

The Risk Parity Radio show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here making sure to take into account your own personal circumstances.